-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TvNLouQknqMrFZM4epCP/U6gUVUsr79CXjykxaFrl5GWfRkZucvEAyIuq1teVHhS opN5kNzPTILnVFdpTRCgRA== 0000950135-97-004447.txt : 19971114 0000950135-97-004447.hdr.sgml : 19971114 ACCESSION NUMBER: 0000950135-97-004447 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970928 FILED AS OF DATE: 19971112 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: EKCO GROUP INC /DE/ CENTRAL INDEX KEY: 0000018827 STANDARD INDUSTRIAL CLASSIFICATION: METAL FORGING & STAMPINGS [3460] IRS NUMBER: 112167167 STATE OF INCORPORATION: DE FISCAL YEAR END: 0102 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-07484 FILM NUMBER: 97713534 BUSINESS ADDRESS: STREET 1: 98 SPIT BROOK RD CITY: NASHUA STATE: NH ZIP: 03062 BUSINESS PHONE: 6038881212 MAIL ADDRESS: STREET 1: 98 SPIT BROOK RD CITY: NASHUA STATE: NH ZIP: 03062 FORMER COMPANY: FORMER CONFORMED NAME: CENTRONICS CORP DATE OF NAME CHANGE: 19880504 FORMER COMPANY: FORMER CONFORMED NAME: CENTRONICS DATA COMPUTER CORP DATE OF NAME CHANGE: 19870304 10-Q 1 EKCO GROUP 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For quarterly period ended SEPTEMBER 28,1997 ----------------- Commission File Number 1-7484 ------ EKCO GROUP, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 11-2167167 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 98 SPIT BROOK ROAD, NASHUA, NEW HAMPSHIRE 03062 --------------------------------------------------- (Address of principal executive offices) (Zip Code) (603) 888-1212 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- As of November 6, 1997, there were issued and outstanding 19,030,390 shares of common stock of the registrant. 1 2 PART I ITEM 1. FINANCIAL STATEMENTS EKCO GROUP, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 28, DECEMBER 29, 1997 1996 ------------ ----------- (UNAUDITED) ASSETS Current assets Cash and cash equivalents $ 375 $ 15,706 Accounts receivable, net 57,808 42,182 Inventories 78,799 47,422 Other current assets 8,386 6,180 Net assets of discontinued operations -- 17,030 Deferred income tax 9,107 10,857 -------- -------- Total current assets 154,475 139,377 Property and equipment, net 34,422 34,998 Other assets 7,621 6,569 Excess of cost over fair value of net assets acquired, net 108,380 111,132 -------- -------- Total assets $304,898 $292,076 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 17,468 $ 18,395 Accrued expenses 33,735 28,688 Income taxes 6,894 2,651 -------- -------- Total current liabilities 58,097 49,734 -------- -------- Long-term obligations, less current portion 124,248 124,182 -------- -------- Other long-term liabilities 10,478 11,052 -------- -------- Series B ESOP Convertible Preferred Stock, net; outstanding 1,369 shares and 1,439 shares, respectively, redeemable at $3.61 per share 4,401 4,098 -------- -------- Commitments and contingencies -- -- Minority interest 494 495 -------- -------- Stockholders' equity Common stock, $.01 par value; outstanding 18,984 shares and 18,580 shares, respectively 189 186 Capital in excess of par value 108,854 107,622 Cumulative translation adjustment 799 869 Retained earnings (deficit) 1,879 (1,352) Unearned compensation (2,694) (2,963) Pension liability adjustment (1,847) (1,847) -------- -------- 107,180 102,515 -------- -------- Total liabilities and stockholders' equity $304,898 $292,076 ======== ========
The accompanying notes are an integral part of the financial statements. 2 3 EKCO GROUP, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 28, 1997 AND SEPTEMBER 29, 1996 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED ---------------------- ----------------------- 1997 1996 1997 1996 ------- -------- -------- -------- Net revenues $81,818 $ 73,116 $193,216 $174,812 ------- -------- -------- -------- Costs and expenses Cost of sales 52,634 45,843 128,662 115,867 Selling, general and administrative 16,123 16,066 45,868 41,941 Special charge 169 2,000 783 2,000 Amortization of excess of cost over fair value 909 909 2,725 2,726 ------- -------- -------- -------- 69,835 64,818 178,038 162,534 ------- -------- -------- -------- Income before interest and income taxes 11,983 8,298 15,178 12,278 ------- -------- -------- -------- Net interest Interest expense 3,072 3,235 9,325 9,422 Investment income (75) (2) (605) (101) ------- -------- -------- -------- 2,997 3,233 8,720 9,321 ------- -------- -------- -------- Income from continuing operations before income taxes and extraordinary charge 8,986 5,065 6,458 2,957 Income tax expense 4,450 3,486 3,227 1,738 ------- -------- -------- -------- Income from continuing operations before extraordinary charge 4,536 1,579 3,231 1,219 Loss from discontinued operations, net of tax benefit of $748 and $1,234 -- (22,909) -- (23,462) ------- -------- -------- -------- Income (loss) before extraordinary charge 4,536 (21,330) 3,231 (22,243) Extraordinary charge for early retirement of debt, net of tax benefit of $2,139 -- -- -- (3,208) ------- -------- -------- -------- Net income (loss) $ 4,536 $(21,330) $ 3,231 $(25,451) ======= ======== ======== ======== Earnings (loss) per common share Earnings (loss) from continuing operations before extraordinary charge $ 0.22 $ 0.09 $ 0.16 $ 0.07 Loss from discontinued operations -- (1.24) -- (1.27) ------- -------- -------- -------- Loss before extraordinary charge 0.22 (1.15) 0.16 (1.20) Extraordinary charge -- -- -- (0.18) ------- -------- -------- -------- Earnings (loss) per common share $ 0.22 $ (1.15) $ .16 $ (1.38) ======= ======== ======== ======== Weighted average number of shares used in computation of per share data 20,983 18,515 20,761 18,462 ======= ======== ======== ========
The accompanying notes are an integral part of the financial statements. 3 4 EKCO GROUP, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 28, 1997 AND SEPTEMBER 29, 1996 (AMOUNTS IN THOUSANDS) (UNAUDITED)
1997 1996 ---- ---- Cash flows from operating activities Net income (loss) $ 3,231 $ (25,451) Adjustments to reconcile net income to net cash provided by (used for) operations Depreciation 5,475 5,556 Amortization of excess of cost over fair value 2,725 2,726 Amortization of deferred finance costs 426 366 Other amortization 3,941 4,491 Special charges 783 2,000 Loss from discontinued operations -- 23,462 Extraordinary charge -- 3,208 Other 2,464 (1,086) Changes in certain assets and liabilities, net of effects from acquisition of business, affecting cash provided by (used in) operations Accounts receivable (16,016) (10,747) Inventories (31,479) (12,084) Prepaid marketing costs (4,790) (2,184) Other assets 203 (551) Accounts payable and accrued expenses 553 8,234 Income taxes payable 4,240 (537) -------- --------- Net cash used in operations: Continuing operations (28,244) (2,597) Discontinued operations (570) 1,355 -------- --------- Net cash used in operations (28,814) (1,242) -------- --------- Cash flows from investing activities Proceeds from sale of property and equipment 144 1,789 Capital expenditures for continuing operations (5,078) (5,921) Proceeds from sale of discontinued operations 17,600 -- Capital expenditures for discontinued operations -- (1,441) -------- --------- Net cash provided by (used in) investing activities 12,666 (5,573) -------- --------- Cash flows from financing activities Proceeds from issuance of notes payable and long-term obligations -- 125,292 Payment of dividends -- (792) Payment of notes and long-term obligations -- (118,045) Other 832 513 -------- --------- Net cash provided by financing activities 832 6,968 Effect of exchange rate changes on cash (15) (5) -------- --------- Net increase (decrease) in cash and cash equivalents (15,331) 148 Cash and cash equivalents at beginning of year 15,706 142 -------- --------- Cash and cash equivalents at end of period $ 375 $ 290 ======== ========= Cash paid during the period for Interest $ 5,915 $ 3,739 Income taxes (3,218) 52
The accompanying notes are an integral part of the financial statements. 4 5 EKCO GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) (1) BASIS OF PRESENTATION AND OTHER MATTERS The consolidated condensed financial statements included herein have been prepared by Ekco Group, Inc. (the "Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. It is believed, however, that the disclosures are adequate to make the information presented not misleading. It is suggested that these condensed financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's latest annual report on Form 10-K. The consolidated condensed financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. The condensed financial statements, in the opinion of management, reflect all adjustments necessary to fairly state the Company's financial position and the results of its operations. Such adjustments are of a normal recurring nature. A large part of the Company's business is seasonal. Historically, revenues in the last half of the calendar year have been greater than revenues in the first half of the year. Accordingly, the results for the entire year may not necessarily be the product of annualizing results for any interim period. (2) DISCONTINUED OPERATIONS On January 31, 1997, the Company's Board of Directors approved management's plan to dispose of the Company's molded plastic products business. Accordingly, in its latest annual report on Form 10-K the Company reported the results of the operations of the molded plastics products business and the loss on disposal as discontinued operations. During the nine months ended September 28, 1997 the Company sold all of the assets of its molded plastics products business for cash proceeds of approximately $17.6 million and a $2.0 million promissory note which is included in other assets at September 28, 1997. 5 6 EKCO GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (2) DISCONTINUED OPERATIONS CONTINUED Net assets of discontinued operations classified separately in the consolidated condensed balance sheets as of December 29, 1996 are as follows: (Amounts in thousands) Accounts receivable, net $ 4,210 Inventories 6,138 Prepaid expenses and other assets 67 Property and equipment, net 16,743 Accounts payable (2,416) Accrued expenses (2,212) Loss on disposal (5,500) ------- $17,030 =======
Certain information with respect to the statement of operations from discontinued operations for the three and nine months ended September 29, 1996 follows:
THREE MONTHS NINE MONTHS ------------ ----------- (AMOUNTS IN THOUSANDS) Net revenues $ 10,344 $ 21,489 -------- -------- Cost of sales 10,060 20,469 Selling, general and administrative 1,013 2,387 Adjustment to carrying value 22,728 22,728 Goodwill amortization 200 601 -------- -------- 34,001 46,185 -------- -------- Loss before income tax benefit (23,657) (24,696) Income tax benefit (748) (1,234) -------- -------- Loss from discontinued operations $(22,909) $(23,462) ======== ========
(3) ACCOUNTS RECEIVABLE, NET Accounts receivable consisted of the following:
SEPTEMBER 28, 1997 DECEMBER 29, 1996 ------------------ ----------------- (AMOUNTS IN THOUSANDS) Accounts receivable $58,924 $42,942 Allowance for doubtful accounts (1,116) (760) ------- ------- $57,808 $42,182 ======= =======
6 7 EKCO GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (4) INVENTORIES The components of inventory were as follows:
SEPTEMBER 28, 1997 DECEMBER 29, 1996 ------------------ ----------------- (AMOUNTS IN THOUSANDS) Raw materials $12,837 $ 9,628 Work in process 4,188 3,253 Finished goods 61,774 34,541 ------- ------- $78,799 $47,422 ======= =======
(5) PROPERTY AND EQUIPMENT, NET Property and equipment consisted of the following:
SEPTEMBER 28, 1997 DECEMBER 29, 1996 ------------------ ----------------- (AMOUNTS IN THOUSANDS) Property and equipment at cost Land, buildings and improvements $14,857 $14,623 Equipment, factory and other 62,567 58,963 ------- ------- 77,424 73,586 Less accumulated depreciation 43,002 38,588 ------- ------- $34,422 $34,998 ======= =======
(6) EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED, NET Excess of cost over fair value of net assets acquired is net of accumulated amortization of $31,410 and $28,690 as of September 28, 1997 and December 29, 1996, respectively. (7) LONG-TERM OBLIGATIONS On July 8, 1997, the Company amended and restated its revolving credit facility ("Credit Agreement"). The restated Credit Agreement provides a maximum credit line of $35 million maturing on April 30, 2000. The maximum outstanding balance under the Credit Agreement will equate to 80% of eligible accounts receivable plus 50% of eligible inventory as determined on a monthly basis. Loans under the Credit Agreement bear interest at either the bank's prime rate or the LIBOR rate plus 1.25% or 1.50% depending upon the Company's ratio of Funded Debt to EBITDA (as defined). The Credit Agreement provides for a commitment fee of three-eighths of one percent on the unused portion of the commitment amount. Borrowings under the Credit Agreement are collateralized by substantially all of the assets of the Company not otherwise pledged. The Credit Agreement includes certain financial and operating covenants of which the most restrictive requires the Company to maintain a minimum level of cash flow and net worth. 7 8 EKCO GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (8) INCOME TAXES The Company's effective tax rate fluctuates significantly due to the impact of goodwill amortization which is not deductible for tax purposes. The Company's effective tax rate as reported in its latest annual report on Form 10-K was 787% for the year ended December 29, 1996. The anticipated effective rate for fiscal 1997 is 50%. (9) SERIES B ESOP CONVERTIBLE PREFERRED STOCK, NET Series B ESOP Convertible Preferred Stock, net, consisted of the following:
SEPTEMBER 28, 1997 DECEMBER 29, 1996 ------------------ ----------------- (AMOUNTS IN THOUSANDS) Series B ESOP Convertible Preferred Stock, par value $.01, redeemable at $3.61 per share $4,955 $ 5,196 Unearned compensation (554) (1,098) ------ ------- $4,401 $ 4,098 ====== ======= (10) COMMON STOCK, $.01 PAR VALUE Share information regarding common stock consisted of the following: SEPTEMBER 28, 1997 DECEMBER 29, 1996 ------------------ ----------------- (AMOUNTS IN THOUSANDS) Authorized shares 60,000 60,000 ====== ====== Shares issued 28,400 27,997 Shares held in treasury 9,416 9,417 ------ ------ 18,984 18,580 ====== ======
(11) EARNINGS PER COMMON SHARE Primary earnings per common share are based upon the weighted average of common stock and dilutive common stock equivalent shares outstanding during each period. Fully diluted earnings per share have been omitted since they are either the same as primary earnings per share or anti-dilutive. The weighted average number of shares used in computation of earnings per share consisted of the following for the periods presented: 8 9 EKCO GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (11) EARNINGS PER COMMON SHARE (CONTINUED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 28, SEPTEMBER 29, SEPTEMBER 28, SEPTEMBER 29, 1997 1996 1997 1996 ------------ ------------ ----------- ------------ (AMOUNTS IN THOUSANDS) Weighted average shares of Common stock outstanding during the period 18,978 18,515 18,867 18,462 Series B ESOP Convertible anti- anti- Preferred Stock 1,376 dilutive 1,398 dilutive Weighted average common equivalent anti- anti- shares due to stock options 629 dilutive 496 dilutive ------ -------- ------ -------- 20,983 18,515 20,761 18,462 ====== ======== ====== ========
(12) CONTINGENCIES LEGAL PROCEEDINGS The Company is a party to several pending legal proceedings and claims. Although the outcome of such proceedings and claims cannot be determined with certainty, the Company's management is of the opinion that the expected final outcome should not have a material adverse effect on the Company's financial position, results of operations or liquidity. ENVIRONMENTAL MATTERS From time to time, the Company has had claims asserted against it by regulatory agencies or private parties for environmental matters relating to the generation or handling of hazardous substances by the Company or its predecessors and has incurred obligations for investigations or remedial actions with respect to certain of such matters. While the Company does not believe that any such claims asserted or obligations incurred to date will result in a material adverse effect upon the Company's financial position, results of operations or liquidity, the Company is aware that at its facilities in Massillon and Hamilton, Ohio; Easthampton, Massachusetts; Lititz, Pennsylvania; Chicago, Illinois and at its previously owned facility in Hudson, New Hampshire hazardous substances and oil have been detected and that additional investigation will be, and remedial action will or may be, required at such facilities. Operations at these and other facilities currently or previously owned or leased by the Company utilize, or in the past have utilized, hazardous substances. There can be no assurance that activities at these or any other facilities or future facilities may not result in additional environmental claims being asserted against the Company or additional investigations or remedial actions being required. 9 10 EKCO GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) ENVIRONMENTAL MATTERS (CONTINUED) In connection with the acquisition of Kellogg Brush Manufacturing Co. and subsidiaries ("Kellogg") by the Company in 1993, the Company engaged environmental engineering consultants ("Consultants") to review potential environmental liabilities at all of Kellogg's properties. Such investigation and testing resulted in the identification of likely environmental remedial actions, operation, maintenance and ground water monitoring and the estimated costs thereof. Management, based upon the engineering studies, originally estimated the total remediation and ongoing ground water monitoring costs to be approximately $6.0 million, including the effects of inflation, and accordingly at that time, recorded a liability of approximately $3.8 million, representing the undiscounted costs of remediation and the net present value of future costs discounted at 6%. Based upon the most recent cost estimates provided by the Consultants, the Company believes the total remediation and compliance costs will be approximately $1.8 million and the expense for the ongoing operation, maintenance and ground water monitoring will be $12,500 for Fiscal 1997 and $12,500 to $25,000 for each of the 30 years thereafter. As of September 28, 1997, the liability recorded by the Company was approximately $3.3 million. Although the current estimated costs of remediation are less than the liability recorded at September 28, 1997, the Company does not consider any adjustment to be prudent at this time given the inherent uncertainties involved in completing the remediation processes. The Company expects to pay approximately $110,500 of the remediation costs in the current year ("Fiscal 1997") with the balance being paid out in fiscal 1998 and 1999. During the first nine months of Fiscal 1997, the Company paid approximately $102,000 of such costs. The estimates may subsequently change should additional sites be identified or further remediation measures be required or undertaken or interpretation of current laws or regulations be modified. The Company has not anticipated any insurance proceeds or third-party payments in arriving at the above estimates. (13) SPECIAL CHARGE The special charge for Fiscal 1997 relates to the exercise of stock appreciation rights granted to the Company's former Chief Executive Officer pursuant to a December 1996 severance arrangement. The special charge for Fiscal 1996 relates to an adjustment of the carrying value of certain real property to fair market value. (14) EXTRAORDINARY CHARGE On March 25, 1996, the Company sold $125.0 million of its 9.25% Senior Notes due 2006 at a price of 99.2291% of face value in a private offering to institutional investors. The Company used the net proceeds of the Senior Notes to (i) repurchase its outstanding 12.7% Notes due 1998 and 7.0% Convertible Subordinated Note due 2002 and (ii) repay substantially all amounts outstanding under its revolving credit facility. The early extinguishment of the 12.7% Notes and 7% Convertible Subordinated Note resulted in an extraordinary pre-tax charge of $5.3 million and an after tax charge of $3.2 million. 10 11 EKCO GROUP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS The following discussion and analysis of the consolidated results of operations for the thirteen week periods ended September 28, 1997 (the "Third Quarter of Fiscal 1997") and September 29, 1996 (the "Third Quarter of Fiscal 1996") and for the thirty-nine week periods ended September 28, 1997 (the "First Nine Months of Fiscal 1997") and September 29, 1996 (the "First Nine Months of Fiscal 1996") and the financial condition at September 28, 1997 should be read in conjunction with the Company's Consolidated Condensed Financial Statements and Notes thereto. Because of the seasonality of the Company's revenues, which have historically been concentrated in the second half of its fiscal year, the results of operations and the balance sheet for, or as of, the end of any interim period may not be indicative of either a full year's operations or the financial condition of the Company at the end of any fiscal year. NET REVENUES Net revenues for the Third Quarter and First Nine Months of Fiscal 1997 increased approximately $8.7 million (11.9%) and $18.4 million (10.5%) from the comparable prior year periods, respectively. The increase in net revenues was primarily due to higher sales of kitchen tools and gadgets ($8.8 million for the Third Quarter and $13.9 million for the Nine Months) resulting from the roll-out of new plan-o-grams at several key customers, and a high level of acceptance of new products introduced during fiscal 1996. Although Bakeware sales increased $2.5 million from the First Nine Months of Fiscal 1996 principally due to sales of the Company's new insulated bakeware, Bakeware sales for the Third Quarter of Fiscal 1997 declined $1.4 million from the comparable prior year period. The decline was principally due to a large pallet promotion in fiscal 1996 that the customer did not offer in Fiscal 1997. The Third Quarter and First Nine Months of Fiscal 1996 included net revenues of $388,000 and $2.9 million, respectively, from the Company's wireforming business, which was divested in the fourth quarter of Fiscal 1996. GROSS PROFIT The gross profit margin for the Third Quarter and First Nine Months of Fiscal 1997 was 35.7% and 33.4%, respectively. For the Third Quarter and First Nine Months of Fiscal 1996, the gross profit margin was 37.3% and 33.7%, respectively. The decline in gross margin for the Third Quarter of Fiscal 1997 from the prior year level was primarily due to costs associated with the consolidation of the Company's cleaning facilities (approximately $400,000 for the Third Quarter and $550,000 for the First Nine Months), costs associated with increased levels of inventory, the effect of intensive competition across all of the Company's product lines and changes in product mix. The effects of these factors on the gross margin were partially mitigated by successful efforts in obtaining lower purchase prices for the Company's kitchen tools and gadget products and improvement in bakeware manufacturing efficiencies. 11 12 EKCO GROUP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) SELLING, GENERAL AND ADMINISTRATIVE EXPENSE Selling, general and administrative expenses for the Third Quarter of Fiscal 1997 were essentially unchanged from the prior year's Third Quarter, but for the First Nine Months of Fiscal 1997 increased approximately $3.9 million (9.4%) from the comparable prior year period. The increase in selling, general and administrative expenses was due primarily to increased investment in new packaging, costs associated with new display fixtures, increased costs of maintaining current customers and acquiring new distribution in an increasingly competitive market place and increased expenditures associated with the growth of the Company's subsidiary in the United Kingdom. In addition, selling expenses increased as a result of higher year-over-year sales volume. EXTRAORDINARY CHARGE On March 25, 1996, the Company sold $125.0 million of its 9.25% Senior Notes due 2006 at a price of approximately 99.2% of face value in a private offering to institutional investors. The Company used the net proceeds of the Senior Notes to (i) repurchase its outstanding 12.7% Notes due 1998 and 7.0% Convertible Subordinated Note due 2002 and (ii) repay substantially all amounts outstanding under its revolving credit facility. The early extinguishment of the 12.7% Notes and 7% Convertible Subordinated Note resulted in an extraordinary pre-tax charge of $5.3 million and an after tax charge of $3.2 million. LIQUIDITY AND CAPITAL RESOURCES On January 31, 1997, the Company's Board of Directors approved management's plan to dispose of the Company's molded plastic products business. Accordingly, in its latest annual report on Form 10-K, the Company reported the results of the operations of the molded plastics products business and the loss on disposal as discontinued operations. During the First Nine Months of Fiscal 1997, the Company sold all of the assets of its molded plastic products business for cash proceeds of approximately $17.6 million and a $2.0 million promissory note. The $17.6 million in cash generated from the sale of the assets of the Company's molded plastic products business along with $15.7 million of cash on hand was used to fund capital expenditures of approximately $5.0 million and operations during the First Nine Months of Fiscal 1997, including a $31.4 million growth in the Company's inventories. The inventory growth was partially due to seasonality, a planned increase in inventories to facilitate higher service levels and an accumulation of safety stock relating to the consolidation of the Company's cleaning products manufacturing facilities. As reported in the Company's latest report on Form 10-K, the Company is in the process of combining the manufacturing of cleaning products currently located in Easthampton, Massachusetts into the existing cleaning products manufacturing facility in Hamilton, Ohio. The consolidation is expected to be completed during the fourth quarter of Fiscal 1997. It is expected that there will be additional operating expenses of approximately $600,000 associated with the orderly transition of manufacturing activities to the Hamilton, Ohio facility. The increase in accounts receivable and accrued expenses from the December 29, 1996 levels was primarily due to the seasonality of the Company's business. 12 13 EKCO GROUP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) On July 8, 1997, the Company amended and restated its revolving credit facility ("Credit Agreement"). The Credit Agreement provides a maximum credit line of $35 million maturing on April 30, 2000. The maximum outstanding balance under the Credit Agreement will equate to 80% of eligible accounts receivable plus 50% of eligible inventory as determined on a monthly basis. At September 28, 1997, $23.5 million was available for general corporate purposes under the Credit Agreement net of $11.5 million in outstanding letters of credit. The Company believes it has sufficient borrowing capacity to finance its ongoing operations for the foreseeable future. The Company, however, may require additional funds to finance acquisitions. The Company has provided approximately $3.3 million for environmental remediation and ongoing operation, maintenance and ground water monitoring costs associated with facilities owned or occupied by the Company's cleaning products business. The Company believes this provision is adequate, but will continue to monitor and adjust the provision, as appropriate, should additional sites be identified or further remediation measures be required or undertaken or interpretation of current laws or regulations be modified. RECENT ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings Per Share (FASB No. 128). FASB No. 128 supersedes APB No. 15 and specifies the computation, presentation and disclosure requirements for earnings per share. FASB No. 128 is effective for financial statements for both interim and annual periods ending after December 15, 1997 and early application is not permitted. Accordingly, the Company will apply FASB No. 128 for the quarter and year ended December 31, 1997 and restate prior information as required under the statement. The Company has determined that if FASB No. 128 had been applied for the nine months ending September 28, 1997 the impact on earnings per share as currently stated would have been immaterial. BUSINESS OUTLOOK This Quarterly Report, including "Management's Discussion and Analysis of Results of Operations and Financial Condition," contains forward-looking statements made pursuant to the safe harbor provision of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such statements are based on management's current expectations and are subject to a number of factors and uncertainties which could cause actual results to differ materially from those described in the forward-looking statements. Such factors and uncertainties include, but are not limited to: the impact of the level of the Company's indebtedness; restrictive covenants contained in the Company's various debt documents; general economic conditions and conditions in the retail environment; the Company's dependence on a few large customers; price fluctuations in the raw materials used by the Company; competitive conditions in the Company's markets; the timely introduction of new products; the impact of competitive products and pricing; certain assumptions related to consumer purchasing patterns; the seasonal nature of the Company's business; and the impact of federal, state and local environmental requirements (including the impact of current or future environmental claims against the Company). As 13 14 EKCO GROUP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) BUSINESS OUTLOOK (CONTINUED) a result, the Company's results may fluctuate, especially when measured on a quarterly basis. These forward looking statements represent the Company's best estimate as of the date of this Form 10-Q. The Company assumes no obligation to update such estimates except as required by the rules and regulations of the Securities and Exchange Commission. 14 15 EKCO GROUP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. The Company is a party to several pending legal proceedings and claims, including the matters described below. Although the outcome of such proceedings cannot be determined with certainty, the Company's management, after consultation with legal counsel, is of the opinion that the expected final outcome should not have a material adverse effect on the Company's financial position, results of operation or liquidity. In April 1996, the U.S. District Court for the Northern District of Ohio ruled that certain insulated bakeware products manufactured by the Company infringed a patent held by a third-party plaintiff. The Company ceased manufacturing such products in December 1995. In July 1996, the court enjoined the Company from infringing the patent and awarded the plaintiff a royalty of 2% of sales, or approximately $88,000. The Company believes that it is not liable for infringement, and in December 1996, the Company filed a notice of appeal, and thereafter, the third-party plaintiff filed a cross-appeal. The Company and its counsel believe that the Company has meritorious grounds for its appeal of the court's decision. The Company's management believes that the final outcome will not have a material adverse effect on the Company's financial position, results of operations or liquidity. ENVIRONMENTAL REGULATION AND CLAIMS From time to time, the Company has had claims asserted against it by regulatory agencies or private parties for environmental matters relating to the generation or handling of hazardous substances by the Company or its predecessors and has incurred obligations for investigations or remedial actions with respect to certain of such matters. While the Company does not believe that any such claims asserted or obligations incurred to date will result in a material adverse effect upon the Company's financial position, results of operations or liquidity, the Company is aware that at its facilities in Massillon and Hamilton, Ohio; Easthampton, Massachusetts (more fully described in Note 12 of Notes to Consolidated Condensed Financial Statements herein-above); Lititz, Pennsylvania; Chicago, Illinois and at the previously owned facility in Hudson, New Hampshire, hazardous substances and oil have been detected and that additional investigation will be, and remedial action will or may be, required at such facilities. Operations at these and other facilities currently or previously owned or leased by the Company utilize, or in the past have utilized, hazardous substances. There can be no assurance that activities at these or any other facilities or future facilities may not result in additional environmental claims being asserted against the Company or additional investigations or remedial actions being required. 15 16 EKCO GROUP, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONTINUED) ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibit: 10.22 Amended and Restated Credit Agreement dated as of April 11, 1995 and amended and restated as of July 8, 1997 with Fleet National Bank (incorporated herein by reference to Exhibit 10.22 to Form 10-Q for the quarter ended June 29, 1997). 27 Financial Data Schedule (b) Reports on Form 8-K: None. 16 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EKCO GROUP, INC. ---------------------------------- (Registrant) Date: NOVEMBER 12, 1997 By: /s/ MALCOLM L. SHERMAN ----------------- ---------------------------------- Malcolm L. Sherman Chairman and Chief Executive Officer By: /s/ DONATO A. DENOVELLIS ---------------------------------- Donato A. DeNovellis Executive Vice President, Finance and Administration, and Chief Financial Officer 17 18 INDEX TO EXHIBIT FILED WITH FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 28, 1997 EXHIBIT NO. DESCRIPTION 27 Financial Data Schedule 18 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS 9-MOS DEC-28-1997 DEC-30-1996 SEP-28-1997 1 375 0 58,924 1,116 78,799 154,475 77,424 43,002 304,898 58,097 124,248 4,401 0 189 106,991 304,898 193,216 193,216 128,662 174,530 3,508 358 9,325 6,458 3,227 3,231 0 0 0 3,231 .16 .16
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